For people who are in pension plans, (yes there are some in the private section, but mostly in the government sectors), they face a decision at retirement of how to take the retirement income distribution.
Basically, they have two options. They can take a lifetime income, which is the highest income the annuitant can receive over their lifetimes. Or, they can take some variation of a survivorship benefit for their spouse. The 50% joint payout is the normal payout, however, some plans will allow 75% and 100%. The higher the percentage spousal benefit, the lower the annuitant payout.
Example:
This example uses the joint and survivor 50% payout.
Let us assume if the annuitant takes the single life payout, the payout would be $2,100 per month. If the annuitant took the survivorship options, the payout would be $1,600. There is a $500 difference per month. Should the spouse die first, usually, the surviving annuitant is stuck with the $1,600 for their life.
On the other hand, if the annuitant took the life income of $2,100 and dies first, the spouse receives nothing.
Options:
A great guarantee options, is to purchase a life insurance plan in the amount which will represent the present value of the survivorship value would be.
By purchasing a $285,000 life insurance policy, using an assumption of 3% earnings on the investment, the payout would be guaranteed for 20 years. If the annuitant wanted the $1,600 a month for a 25 year period, the present value is $334,332.
Scenario:
If the annuitant dies first, the pension would end, however, the life insurance would be paid tax free. The surviving spouse could invested the proceeds and take withdrawals from the account equal to what the spouse would have received under the joint and survivor pension payout. The spouse could take more or less, as needed.
If the spouse predeceased the annuitant the life insurance can be cashed out, or continue to stay in force to create a legacy for the family. The policy also can also be used to supplement a retirement income for the annuitant using the cash value.
Unlike the pensions joint and survivor option, the Pension Maximization Plan offers much more flexibility in the planning. It also allows for maximum payout should the annuitant live a long life while providing security for the spouse.
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